GameStop shares hit by worries of used-game fee on Xbox One

A confusing array of reports about whether Microsoft Corp. intends to charge some sort of special fee for playing used games on the new Xbox One has squelched a strong run-up in GameStop shares — just ahead of the retailer\’s first-quarter earnings report.

Reuters

The Xbox One.

GameStop
shares have slumped nearly 10% so far this week, with most of that drop taking place after Microsoft
held an event at its Redmond, Wash., headquarters on Tuesday to lift the wraps on the new Xbox One game console. This is the first notable drop since GameStop began a strong run following its last earnings report on March 28, with the shares surging more than 40% to just below the $40 mark by last Friday\’s close — the highest level in nearly five years for the stock.

The stock was last trading down 2.3% by midday Wednesday. GameStop reports results for its first fiscal quarter on Thursday morning, before the opening bell.

The drop is notable, especially given that the Xbox One will represent a new piece of gaming hardware for the company to sell in its stores this holiday season. But GameStop still makes most of its profits from the sale of used games. This segment accounted for about 48% of the company\’s gross profits for the company\’s most recent fiscal year, though it only made up 27% of total revenues for that period.

So concerns about whether used games will play on the new console, or whether they will require some extra fee to do so, are pertinent for the company. An early look at the game console published by Wired Magazine suggested that it would be difficult for pre-owned games to play on the console, given that each game is installed on the hard drive before it is played.

A Microsoft spokesperson sent the following statement to MarketWatch, which does not fully put to rest the question about a fee or payment associated with used games:

“We know there is some confusion around used games on Xbox One and wanted to provide a bit of clarification on exactly what we’ve confirmed today. While there have been many potential scenarios discussed, today we have only confirmed that we designed Xbox One to enable our customers to trade in and resell games at retail. Beyond that, we have not confirmed any specific scenarios.\”

Analysts who cover GameStop are also hedging on the question; Sean McGowan of Needham told clients in a note on Wednesday that \”more details are needed\” to assess the potential impact to GameStop. Colin Sebastian of Robert W. Baird said he expects \”formal clarification by Microsoft in the coming weeks.\”

Michael Olson of Piper Jaffray said he expects that the uncertainty will cloud GameStop\’s shares in the near-term, as there is not yet enough information to \”come to a final conclusion\” about the matter. But he added that Microsoft could put itself at risk by such a fee.

\”Given the PS4 [PlayStation 4] will not be restricting used game sales in any way that is currently apparent, we believe Microsoft would be putting the Xbox One at a disadvantage by creating a cumbersome used game exchange experience,\” Olson wrote in a note to clients on Wednesday.

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